Originally published by AxiTrader
Key Takeaway
The charts suggest lower.
But the AUDUSD continues to find support as the latest CFTC data of net longs highlights. In the week ahead the FOMC and US non-farm payrolls hold the key to the overall outlook.
75 cents must hold.
What You Need To Know
For the third time in a week the Australian dollar found support in the 0.7510/20 region making a low around 0.7511 on Friday. That's encouraging for the bulls who according to the latest CFTC data again lifted their net-long position - or at least the big speculators did - on US futures markets.
That move to increase long positions in the Aussie came as traders reduced their yen and pound shorts, their net USD Index long but reduced their euro longs.
That support for the Aussie, and the associated moves in other forex pairs, together with the rally in emerging market currencies like the Mexican peso and the recent strength of the Chinese yuan speaks to the consolidation of the US dollar.
It's an important consolidation for the Aussie dollar which has largely been driven lower, and then recovered, under the weight of the US dollar's moves in the past 3 months. That's something that is clear in the relationship between the price moves of the US dollar index (black candles) and the AUD/USD (inverted - red candles) over this time frame.
What's clear in the strength of this relationship right now is that the US dollar is predominating over the myriad other drivers of the AUD/USD rate. So where the US dollar goes so goes the Aussie at the moment.
Which means that with little real domestic data other than the NAB's monthly business survey and December trade data out in Australia this week the FOMC January meeting, and non-farm payrolls for December both loom large as the key medium-term drivers of the Aussie.
Given the relatively weak US Q4 GDP data (+1.9% annualised) masked underlying strength. And given Fed chair Yellen - and her colleagues - have been fairly upbeat on the US economy and labour market in speeches so far this year there is a real chance of a more positive spin on the outlook for the economy in the FOMC statement when it is released Thursday morning Australian time.
No one expects the Fed to change its interest rate at this week's meeting. But a more positive slant on the economy - even before the addition of president trump's fiscal stimulus, less regulation, and tax cuts to economic growth - would imply more rate hikes than the market is now pricing.
That could help the US dollar.
Likewise another strong jobs rise - should it come to pass - would also reinforce the policy divergence between the fed and other central banks over the course of the next year or so. That's something that Fed chair Yellen herself said would normally lead to a stronger US dollar.
But as Q4 GDP showed a strong dollar has it's negatives for US growth.
The data showed that net exports subtracted 1.7% from the published growth rate. A weaker US dollar would have seen published US growth higher. That's something the president won't have missed. So we are at risk of a Tweet, or comment from president Trump or the administration, about the dollar if it rallies too far after the Fed or non-farms.
I'll be looking to the specific releases of Australian data as well as the Bank of England and Bank of Japan meetings as shorter term catalysts for moves this week.
Which brings me back to the battle between the bulls and the bears that has been going on in the AUD/USD for a week or so now.
Looking at the technicals, or at least my way of looking at them, the AUD/USD still looks biased lower. A break of 75 cents looks like it's the key to whether the Aussie can continue to find support or whether the apparent bulls step back and see how far it wants to fall before they step back in.
Have a great day's trading.